A committee on angel investment and early stage venture capital appointed by the Planning Commission has pitched for the setting up of a Rs.5,000-crore ‘fund of funds’ while recommending tax incentives and easing of listing and exit norms to boost venture capital investment.
In its report titled ‘Creating a vibrant entrepreneurial ecosystem in India’ submitted to Finance Minister P. Chidambaram here on Monday, the venture capital panel, headed by former Revenue Secretary Sunil Mitra, pointed out that the proposed ‘fund of funds’ would be for seeding early stage venture capital with the objective of boosting investment.
Defining angel investors as those individuals or their groups which invest in unlisted entities at the seed stage, the panel viewed that such investment should not exceed Rs.5 crore by an individual and Rs.10 crore by their group and categorised seed stage venture as business with a turnover below Rs.25 crore.
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The panel, which made a presentation to Mr. Chidambaram and Planning Commission Deputy Chairman Montek Singh Ahluwalia, also sought a provision of Rs.1,000 crore from the government to 10 top academic institutions for setting up Rs.100 crore “on-campus incubators” such as the ones prevalent at Harvard and Stanford.
Alongside, the committee felt that the government should allow easy exit by allowing foreign listings and implementation of liquidation preferences for Category-I Alternate Investment Funds (AIF). It also stressed the need for providing income-tax exemption to angel investors.
In this regard, while pitching for tax incentives for individuals and institutions investing in such funds, it also urged the government to register angels or angel groups and help them in availing of the benefits of pass-through taxation and 10 per cent long-term tax on capital gains.
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In particular, the Mitra panel asked the government to provide tax deductions to individuals and institutions for investment through angel groups or in early stage venture funds in keeping with SEBI definitions in this regard. It pointed out that while the Singapore government provides $80,000 as tax deduction to such persons and bodies who invest through approved angels, similar deduction is provided in the U.S. for two such investments aggregating $500,000.
The panel also recommended the setting up of 15-20 innovation labs in metros as well as Tier01 and Tier-2 cities through the PPP (public-private partnership) mode for collaboration across the region.
The committee also highlighted the need for domestic institutional investors to allocate a certain portion of their corpus to Category I AIFs and said that banks should be encouraged to invest in them by treating these investments as ‘priority sector’ funding.
“Venture debt (debt for SMEs or companies backed by Category I AIFs as per SEBI definition) should be included as priority sector lending with Venture Debt departments in each bank; government can also create a loan guarantee scheme for venture debt,” it said.
Seeking the removal of regulatory hurdles that inhibit domestic fund raising and utilisation of pension, insurance and provident funds for investment of a small part of their corpus in early-stage venture funds, the panel said: “The government should enable small business parks with STPI-like compliance enabling companies with less than 100 employees or less than Rs.25 crore in revenues to work within a highly simplified regulatory overhead”.